Honeywell Battens Down The Hatches

More and more it's looking like 2013 is going to be a challenging year for a variety of businesses. While it's convenient (and not entirely inaccurate) to lay some of this at the feet of the "fiscal cliff," it also looks like the strong industrial rally in North America is petering out, while Europe and China aren't looking strong enough to take up the slack. With all of that in mind, Honeywell's (NYSE:HON) guidance update was not all that surprising. Though this remains a generally underrated conglomerate, the shares don't look like a tremendous bargain today.

Sluggish Growth on the Way for 2013It may well prove to be the case that management at Honeywell is preparing investors for the worst, but it's not looking like 2013 is going to be a banner year. Management guided for organic revenue growth of 1 to 3%, with the midpoint coming in about $150 million shy of the prior sell-side average. While the performance materials business looks to be strong again (good news for the likes of DuPont (NYSE:DD) and BASF (OTC:BASFY)), aerospace and transportation are looking to be pretty soft in terms of revenue growth.

On the transport side, Honeywell is not looking for a big rebound in automobile production, though new product introductions should help a bit. Honeywell's guidance isn't exactly great news for companies like BorgWarner (NYSE:BWA), though it's also not a big surprise. With aerospace and defense, it does look like a mixed bag. Although about 85% of Honeywell's defense business seems safe from sequestration, it's still going to be a difficult year in defense. On the commercial side, new commercial orders should do alright, but it seems like the flight hours data is pointing to tougher conditions for the aftermarket side of the business. If those new planes continue to roll, that should be good for the likes of General Electric (NYSE:GE), but I'll be curious to see how the defense cuts and aftermarket weakness work out for GE and other aerospace players like United Technologies (NYSE:UTX).

Intermec Looks Like a Savvy Little DealWith the update, Honeywell also announced that it was acquiring Intermec (NYSE:IN) for $600 million. Intermec is in the business of mobile computing (hand-held computers), RFID and supply-chain management, with leading positions in automatic ID and data capture (selling products like hand-held scanners and bar code printers). Intermec competes with companies like Motorola Solutions (NYSE:MSI), Zebra (Nasdaq:ZBRA) and Honeywell itself. Adding Intermec will pretty much double the scanning/mobility part of Honeywell's Automation/Control business, and should bring some solid incremental margins in a year or two.

At $10 a share, Honeywell offered a roughly 25% premium to Intermec's prior close. Honeywell is paying a 10 times multiple on a trailing adjusted EBTIDA, though management believes the multiple would be more on the order of 5 times on a run-rate basis including synergies. Intermec looks like an interesting deal for Honeywell. Although the company has not had a very impressive (or consistent) record of revenue, margin or free cash flow (FCF) growth, the technologies and products seem to fit in well with Honeywell's business, and I believe Honeywell can quite likely derive more value from these assets than Intermec was able to on its own. More to the point, this is exactly the sort of modestly-sized, accretive deal that I want to see from Honeywell - it doesn't change anything overnight, but it should boost revenue, margins and FCF relatively soon and offer a solid internal rate of return.

The Bottom LineAlthough I think Honeywell is often overlooked as a quality conglomerate, that's not to say that the stock is all that cheap today. It's probably going to take a couple of years for Honeywell to get back to double-digit FCF margins, and I'm a little concerned that there could be more risk to the performance materials business (from higher natural gas prices) and transportation business (ongoing weakness in European vehicle production). Nevertheless, I think fair value on Honeywell shares ranges from the high $60s to the low $70s today - enough to make this is a worthwhile hold, but not an especially compelling buy.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.